Quebec's Pursuit of the Green Dream Will Lead to Ruin

Quebec's political leaders seem to have fallen for the Great Green Dream of economic prosperity without energy or natural resource production. It's a magical vision of a world powered by unicorns and rainbows, where consumer goods are somehow conjured out of thin air rather than being manufactured with resources extracted from the ground. But experience in Europe, as well as in Ontario, shows that chasing the green dream is a path to financial ruin, not utopia.

On May 6th, Quebec announced long-awaited changes to their mining royalty regime which will raise Quebec's royalties to the highest in Canada. The new regime will be based on the total value of extracted output, unlike the current system that levies royalties based on a company's end-of-year profits. The new three-tiered tax on profits will be introduced with rates based on the profit margin: 16 per cent on up to 35 per cent profit, 22 per cent for profit between 35 and 50 per cent, and 28 per cent for profit above 50 per cent. Strangely, the new royalty regime requires a minimum royalty to be paid regardless of whether a mine is profitable, and mining companies will be required to pay the greater amount of either the minimum royalty or profit tax. Quebec has benefited greatly from its mining sector and in 2011 alone, mining exports reached nearly $16 billion and represented one quarter of Quebec's total exports. Last year, mining operations in Quebec provided more than 17,000 jobs directly and supported an additional 34,000 jobs indirectly in professional services, transport, and processing of metals and minerals. That's a lot of money and revenue to put at risk.

Now, on May 15, Quebec has taken a crack at energy production, tabling legislation that would impose a five-year moratorium on natural gas production in the St. Lawrence River valley via hydraulic fracturing. Hydraulic fracturing, aka "fracking," is the technology that has unleashed a natural gas revolution in the United States, and could likely do the same for Canada. Canada has significant shale gas deposits, largely in the west, but Quebec's Utica shale formation is significant. According to the National Energy Board, the Utica formation holds more than 120 trillion cubic feet of natural gas -- a quantity that's not dissimilar from the Marcellus formation in the US, which is estimated to hold 141 trillion cubic feet. The Canadian Energy Research Institute (CERI) estimates that capital investment in Quebec could reach $23.8 billion if they develop their shale gas resources, and add $60 billion to the province's economic productivity. CERI further estimates that tax revenues from the development of Utica shale would range between $7 billion and $21 billion over 25 years.

Quebec's one-two punch to energy and natural resource production is most likely to hurt the province itself more than the industries who might invest in Quebec: their capital is mobile, and can always go where the prospect for returns are higher. But part of Quebec's assault on energy and natural resource production will be felt by Canadians across the country, as they'll be the ones holding the bag for Quebec's generous social programs as the province can't pay its own way.

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Canada's 'Have' And 'Have-Not' Provinces

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Amount transferred in equalization payments from the federal government to the province, 2013-2014.

Amount transferred in equalization payments from the federal government to the province, 2013-2014.

Amount transferred in equalization payments from the federal government to the province, 2013-2014.

Amount transferred in equalization payments from the federal government to the province, 2013-2014.

Amount transferred in equalization payments from the federal government to the province, 2013-2014.

Amount transferred in equalization payments from the federal government to the province, 2013-2014.

"Have" provinces pay in more than they receive in equalization payments. The amounts paid out by these provinces are not readily available.

"Have" provinces pay in more than they receive in equalization payments. The amounts paid out by these provinces are not readily available.

"Have" provinces pay in more than they receive in equalization payments. The amounts paid out by these provinces are not readily available.

Yes, Newfoundland is a "have" province, thanks to recent offshore oil wealth.
"Have" provinces pay in more than they receive in equalization payments. The amounts paid out by these provinces are not readily available.